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Policy Rules and Large Crises in Emerging Markets


  • Emilio Espino
  • Julian Kozlowski
  • Fernando M. Martin
  • Juan M. Sanchez


Emerging countries have increasingly adopted rules to discipline government policy. The COVID-19 shock led to widespread suspension and modification of these rules. We study rules and flexibility in a sovereign default model with domestic fiscal and monetary policies and long-term external debt. We find welfare gains from adopting monetary targets and debt limits during normal times. Though government policy cannot itself counteract fundamental shocks hitting the economy, the adoption of rules has a significant impact on policy, macroeconomic outcomes and welfare during large, unexpected crises. We also find moderate gains from suspending monetary targets during a crisis and large losses from abandoning debt limits.

Suggested Citation

  • Emilio Espino & Julian Kozlowski & Fernando M. Martin & Juan M. Sanchez, 2022. "Policy Rules and Large Crises in Emerging Markets," Working Papers 2022-018, Federal Reserve Bank of St. Louis, revised 14 Oct 2023.
  • Handle: RePEc:fip:fedlwp:94688
    DOI: 10.20955/wp.2022.018

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    References listed on IDEAS

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    More about this item


    crises; default; sovereign debt; emerging markets; exchange rate; inflation; fiscal policy; monetary policy; rules; discretion; Markov-perfect equilibrium; COVID-19;
    All these keywords.

    JEL classification:

    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy; Modern Monetary Theory
    • F34 - International Economics - - International Finance - - - International Lending and Debt Problems
    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets

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